What is the PEG Index? It is a stock valuation index that helps RMB find bargain stocks. The PEG Index is an index that many growth investors research and understand. This article CophieuX – Ngo will write in detail about the PEG index for us investors.

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What is PEG?

I. What is the PEG Index? What is the PEG coefficient?

The PEG ratio is an important financial metric, but less well known than its big brother, the P/E ratio. The PEG Index is also known as the PEG Factor, or the PEG ratio.

P/E is considered the amount to be paid for 1 dollar of earnings, or P/E is the number of years to break even if profits are unchanged.

You should read the article: Comprehensive P/E ratio, to understand P/E ratio and to understand better about PEG ratio

But the fact that the profits of businesses always change over time, which is one of the many reasons why P/E ratios vary between businesses. (You can see the table below)

So to overcome this situation, investors use the PEG index instead. The PEG ratio shows the relationship between the P/E (price/earnings) ratio and the G earnings growth ratio (EPS).

Therefore, the P/E ratio represents the static nature of the business, while the PEG ratio represents the dynamic nature.

The investor best known for using this strategy is: Peter Lynch.

Peter Lynch: Earned 29.2%/year during his time running the Melagan fund. He is also the author of 2 books On Top of Wall Street & Beating Wall Street. He used to share stock as 4th grade math.

## II. How to calculate PEG index

? The formula for calculating PEG index is:

## PEG = PE/G

With:

PE: That is, P/EG: Future growth rate (%)

Then we understand:

If a stock has a P/E ratio of 15, and when we have a G

Case 1: When G = 10%, then PEG = 15/10 = 1.5 Case 2: When G = 15%, then PEG = 15/15 = 1 Case 3: When G = 20%, then then PEG = 15/20 = 0.75

Arithmetic: PEG is an easy metric to understand, but you can’t assume what P/E and G are and then figure out what PEG is. With PE & G, students in grade 2 have already calculated it. Specific calculation, Ngo will guide in the writing below. But you need to understand the essence of PEG first -Discouragement-

## III. How much PEG ratio is reasonable

?In stocks, the PEG ratio shows the relationship between P/E & G.

We have:

### reasonable P/E = G

That: Reasonable PEG = PE/G = 1. See also: What is Valuation – Meaning of the word Valuation

When a stock has a Price (P) to generate: PEG = 1, it is considered the true value of the stock.

Candlestick:

The stock price is considered to be the true value, when the stock has a PEG index of =1 .

Consequent:

PEG > 1: The stock price is higher than the real valuePEG = 1: The stock price is equal to the real valuePEG

Apply to the above fee example:

Case 1: When G = 10%, then PEG = 15/10 = 1.5=> PEG > 1: Higher than the actual value. So we don’t buy and sell. Case 2: When G = 15%, then PEG = 15/15 = 1.=> PEG = 1: Equal to real value, So we don’t buy or sell. Case 3: When G = 20%, then PEG = 15/20 = 0.75=> PEG

Case 1: Negative P/E. If you have read carefully the article about the P/E Horse index article. Then negative P/E will not make economic sense. (I didn’t spend negative money (he gave me money), to buy your business. Or no one both paid and handed over their loss-making business – Better to declare bankruptcy and dissolve.)

Negative P/E => No valuation or economic significance.

Case 2: When G is negative: Future profit is less than present.

When G is negative, then we should consider not the G of next year but the long-term G, from 3-10 years!

When G is negative, it usually happens because of the following reasons:

Due to the newly established and unstable business Due to temporary difficulties for enterprises Due to fluctuations in the macro economy, economic cycles, Due to changes in the industry: Traditional taxis are gradually replaced by technology taxisDue to political problems internal issues of the business.competitors…

When G is negative, or PEG is negative (G: negative long-term), buying stocks in these companies is riskier. But also pay attention to whether the G is a slight negative or a negative one. When you decide to buy this corporate stock, you should not apply negative PEG but other financial ratios instead. For example, P/B, dividends…

### When PEG is negative, you should use another valuation tool

## V. Other notes when using PEG index

Many investors prefer PEG because it fully demonstrates the correlation between earnings & growth. Because P/E does not show promise of a promising future of the business, because it is static.

To make it easier to imagine, imagine: A business is like a human, if 30-year-old Anh Teo earns 30 million/month, 50-year-old Anh Ti earns 30 million/month. So, who do you think is more likely at the age of 60 for Teo or Ti to have a higher income? (What you think is called correlative valuation Teo & Ti)

However, when the business does not grow very high (0-5%), but pays high dividends. You cannot bid for a corresponding growth rate of P/E = 0->5. Obviously that’s the level very good price!

Also, G is often more difficult to compute, and that is the estimated rate. So how can you calculate this PEG index.

See also: Nanyang technological university (what is ntu?)

BECAUSE. 7 attention to calculate PEG index more accurately? How to calculate the WOOD index

Calculating G with 100% accuracy is impossible! We know exactly what a P/E is, because it’s a historical one. But G is the long-run future growth rate. However, the following 7 tips will help you increase your ability to calculate G more accurately

Not 100% of the code you have calculate growth rate. Lots of volatile stocks, stay away from it. Buffett often invests in predictable businesses. Beware of stocks with too high G-scores. For example, technology stocks increase 50%/year, then P/E = 50 is reasonable. So you can be sure that the growth rate G = 50% will last for a long time. Consider the average growth rate & acceleration of the profit of the business 3-5 years. Evaluate other financial factors such as ROE , has gross profit/sales changed much? Is it stable? Does the firm have a sustainable competitive advantage or a monopoly? How is the current business operation (Expanding stores, factories, increasing capacity) Is the business environment, macro conditions stable? Unless you understand the business well, do not buy stocks with only P/E number is too high (P/E>20 for example) – Except in case of valuation by other methods.

CONCLUDE:

PEG Index shows the relationship between P/E & GPEG Index = PE/GWhen PEG When PEG is negative: Stocks should not be priced using dynamic PEG method, it also has its own advantages & disadvantages. Another indicator for better valuation

Now you know what the PEG index is, How to calculate the PEG index and how to apply the PEG index to the stock market. To learn more other valuation metrics, You should read: 11+ Simple & Super Effective Stock Valuations